Abstract: Since World War II, the significance of the municipal bond market has increased dramatically with state and local government debt growing much more rapidly than public and private debt, federal debt, or the gross national product. Between 1960 and 1970, the annual value of new issues of state and local government bonds increased 110 percent, and there is every indication that the total will continue its rapid rise. In 1969 and 1970, the values of state and local government bond new issues were second only to those of the corporate bond market. Despite the size of the state and local bond market, investors and researchers have devoted their attention to the markets for corporate and U.S. government securities; the interest in these markets has tended to overshadow activity in the municipal bond market.

Abstract: The current literature or business finance states that debt is a cheaper source of capital than stock (tending to reduce the firm's cost of capital), because interest is deductible for income tax purposes while the return to common stockholders is subject to tax. It is even possible to issue debt without increasing the risk to the owners (the debt is issued to stockholders in proportion to the ownership of stock, or equivalently investors buy a mixture of stocks and bonds on the market). However, it is argued in this paper that if we assume that the present stockholders have no further resources available for investment in the firm, but the enterprise needs additional resources, then the present stockholders have to make a basic decision about whether to issue stock or debt to raise the additional needed capital. The issuance of debt in this situation increases risk, and the issuance of stock dilutes ownership. Even when bondholders require a much lower contractual return than the expected annual return of stockholders, the issuance of more stock may be preferred to the issuance of debt.

Abstract: In 1909 John Moody devised a system for rating corporate debt securities according to their relative investment merit, and in 1919 the ratings were applied to municipal bonds. This rating system continues today in essentially the same form. The purpose of the ratings is to provide investors with a simple system of gradation by which varying degrees of risk might be observed. Gradations of investment quality are indicated by rating symbols, each symbol representing a group in which the quality characteristics are broadly the same. It is not claimed that two bonds with the same rating are of precisely the same quality but only that the two are in the same general range on the quality spectrum. On the other hand, one can view the ratings as indicating an order of preference for bonds where factors other than quality are the same. There are nine rating symbols, ranging from the symbol denoting the poorest investment quality and the most risk (C) to the symbol denoting the highest investment quality and the least risk (Aaa). The first four rating symbols, Aaa, Aa, A, and Baa cover those bonds in which investment quality predominates; lower rated bonds have predominantly speculative characteristics. Institutional investors for the most part confine their investments to the four highest grades of bonds and banking regulatory authorities use bond ratings when examining the condition of banks. Neither market appreciation nor market depreciation in a bank's bond portfolio is taken into account in figuring net sound capital for Group I securities. "Group I securities are marketable obligations in which the investment characteristics are not distinctly or predominantly speculative. This group includes general market obligations in the four highest grades and unrated securities of equivalent value." 1 Although bond ratings are not the only basis of determining investment quality when examining a bank's bond portfolio, in practice, bond ratings become very important measures. Moody's lists several qualifications to the use of bond ratings. One is that, since ratings are designed exclusively for the purpose of grading bonds according to their investment qualities, they should not be used alone as a basis for investment decisions. For instance, they have no value in forecasting price changes. Secondly, the ratings themselves are not to be construed as a recommendation with respect to "attractiveness." The attractiveness of a given bond may also depend upon its yield, its maturity date, and other factors.2 Thirdly, Moody's municipal ratings become more meaningful when viewed in the perspective of a given bond's current and future market value, instead of the more prevalent practice of measuring a bond's quality in terms of its likelihood to default.3 (Since the Second World War there have been nearly 120,000 DAVID L. HOFFLAND, C.F.A., is a Vice President and the Director of Bank Investments for the Southern California First National Bank. He is the past president of the Financial Analysts Society of San Diego. 1. Footnotes appear at end of article.

Abstract: control the money supply. However, we feel any such problems are outweighed by the possibility of the FRB providing, some compensation for what almost all economists agree, is the uneven impact of tight money on the housing market. In fact, increasing the money supply by buying FHLB bonds may make monetary policy even more effective by increasing the FRB's ability to more stringently ration funds to other sectors while not forcing a collapse of the housing market. Table 4 shows a quarterly comparison of actual interest costs for FHLB financing since 1965 versus costs under the hypothetical condition that FHLB bonds had been sold to the FRB as suggested above. The cost differential between the two alternative arrangements adds up to 150 million dollars during the period 1969 and the first half of 1970. This is a savings foregone by abiding with the present financing arrangement.

Abstract: As availability of funds in the federal budget for water development has decreased recently, pressure has increased for state and local governments to pay a larger share of the costs. In this situation a difficult question immediately arises-what is the capability of state and local governments to pay a larger share? Of course, there is no easy answer. Expenditures of public funds are policy outcomes of a government's political process in which political, economic, legal and other factors are involved in complex relationships. The traditional sources of capital funds for state and local governments include bond proceeds, tax revenues, and federal financial aid (state aid is also a major source of local government funds). The issuing of bonds is hampered by a variety of legal debt limitations, but there are means for circumventing the limitations. State and local governments vary widely in amounts of taxable resources available and in the extent to which these resources have been tapped. More effective use of revenue resources could be made in some cases. New sources of capital funds for water development ought to be considered-a fee on the use of water per se, for example. Costs associated with water use currently are imposed to cover development costs, but a state might impose additional use fees earmarked for a state water development fund.

Abstract: The Investment Bankers Association for many years encouraged the use of the net interest cost method of computing the cost of a bond issue [e.g., 1, pp. 128-131]. This usage did not generate much excitement in the financial or academic communities until the fall of 1972. In October 1972, a $25 million pollution control bond issue of the state of Minnesota made headlines in business periodicals and the financial sections of many newspapers. The bonds were awarded to Dillon, Read underwriting syndicate, since their bid represented the lowest "net interest cost." The reason the issue generated headlines was that it paid 50% interest per year for bonds maturing in the first four years after issue. Bonds maturing in later years paid lower interest rates, and bonds maturing after 1986 promised to pay 0.1 per year. Hopewell, Kaufman, and West [3] estimate that Minnestoa's use of the net interest cost method will cost the state an extra $1 million. In municipal issues bonds maturing early generally carry a relatively higher interest rate than those maturing in later years. The motivation for such payout arrangements lies in the use of the net interest cost method of computing the cost of the bond issue. While the Minnesota issue attracted a great deal of attention, this type of issue is not rare. For example, in November 1972, Harford County, Maryland, awarded $6 million of bonds to a syndicate headed by Chase Manhattan Bank where the interest rate was 7% for ten years and then declined to 1/10% for bonds maturing in 1997. Once or twice a week "tombstones" published in the financial newspapers announce similar types of issues. It will be argued here that the use of net interest cost introduces an undesirable bias into the decision process. If we assume that the investment banking community understands the nature of the bias, but that municipal and state financial officers do not, then this is an undesirable situation. The governmental financial officer thinks he is accepting the lowest cost offer but may actually be accepting an offer that can easily be the highest cost. Rules of thumb tend to be accepted when they give reasonable results for recurring situations. The net interest cost method used by investment bankers is such a rule of thumb and the effects of using the calculation seem to be acceptable to practitioners. The results are consistent with the actuarial yield of the bond, if the calculations are applied to one bond issue paying the same amount of interest throughout the life of the bond. If there are serial bonds paying greatly different amounts of interest, the measure is unreliable. It has been criticized in the theoretical literature [e.g., 5] but continues to be used in practice.

Abstract: A GREAT DEAL of theoretical and quantitative research into speculative markets has been concerned with the relationship between risk and return. It is generally accepted that it is possible, on the average, to obtain an above-normal return by taking extra risks. One of the basic concepts of this work has been that of a riskless asset. The most obvious riskless asset is cash, which has complete liquidity and zero return. In most situations superior "riskless" assets are available; assets which also have complete or near complete liquidity and also give a positive return. One example is a callable loan at a fixed rate of interest, such as a deposit in a Post Office or Government savings bonds. However, if there has been a period in the recent past when public confidence in cash has completely collapsed, as would occur during a period of hyper-inflation, cash may no longer be viewed as riskless and the public may need to look elsewhere for low-risk investments. Further, if one has retained any capital after a period of currency collapse, one may well become extremely risk averse. The kinds of investments that might be considered would include property or land but of course the traditional ones are silver and gold. In Greece there was a particularly well-developed market in gold sovereigns which was of considerable importance to the middle class. As it gave very small, or even negative returns over long periods we shall suggest that it survived entirely because its clientel was very risk adverse because of lack of confidence in the currency following earlier politically and economically troubled periods. In the next section the basic features of this market are described. Section three discusses the returns available on various investments. Section IV presents an analysis of the price series for gold sovereigns during a period of free movement. The final section contains some concluding comments.

Abstract: The federal securities laws of the United States require the registration of stock exchanges and of securities.' A security must be registered with the United States Securities and Exchange. Commission ("SEC") and approved for listing by a registered stock exchange before it may be traded on any such exchange. The application for listing must be filed by the issuer of that security, although a security listed on one registered stock exchange may be admitted to unlisted trading privileges on other registered stock exchanges upon the application of the latter exchange.2 Each of the registered stock exchanges has its own listing standards concerning the quality of the security and the breadth of investor interest in it, as well as requirements for continuing disclosure of information by the issuer.' Although a few very respected issuers have chosen not to list their common stocks, listed stocks are generally of higher quality than unlisted stocks. The quality of the stocks listed on any particular registered stock exchange is related to the rigor of its listing standards. Generally, the stock listed on the New York Stock Exchange ("NYSE") are of the highest quality, followed by those listed on the American Stock Exchange and followed still by those listed on the various regional stock exchanges. Although the principal market for most listed bonds is over the counter, registered stock exchanges have rules requiring their members to execute on their floors all transactions in stocks that they have listed, unless certain conditions have been met.4 Although the NYSE once attempted to prohibit its members from trading NYSE listedstocks as principal on other registered stock exchanges where they were also admitted to trading, the SEC held in 1941 that any such prohibition was anti-competitive and consequently illegal.5 Nevertheless, the exchanges have continued to inhibit their members from executing transactions in listed stocks in the over-the-counter market either as principal or as agent, and these inhibitions have been extremely effective. The SEC, however, has recently indicated that competitive barriers between the exchange and over-the-counter markets should also be eliminated.6 The over-the-counter market in listed bonds has, of course, long be.en well known. When the SEC conducted its Special Study of the Securities Markets in 1963 it found, much to its own surprise and to the, surprise of many persons, that brokerdealers that were not members of any registered stock exchange were executing a substantial number of overthe counter transactions in listed stocks, primarily with financial institutions. The Special Study coined the phrase "third market" to refer to such over-the-counter transactions in listed stocks by broker-dealers.7 As financial institutions became accustomed to trading listed stocks away from the registered stock exchanges where they are listed, some attempts 1. Footnotes appear at end of article.

Abstract: THIs STUDY concerns itself with two primary undertakings: (1) it provides an addition to current theory on the term structure of interest rates; and (2) it tests a model of the term structure presented by Franco Modigliani and Richard Sutch in the Journal of Political Economy and in the Papers and Proceedings of the American Economic Association. The theoretical contribution centers around the role of the period for which a participant intends to be in the debt market, or "horizon." It is argued that whatever is the participant's purpose for being in the market, he cannot operate without a time horizon. Moreover, since a horizon is implicit in any decision about debt market participation it therefore should be accorded a role in the decision-making process. A game-theoretic approach is used to introduce a horizon to the two primary schools of term structure thought, the "expectations" hypothesis and the "segmentation" hypothesis. It is the presence of this horizon, along with the presence of uncertainty, which ultimately allows the two hypotheses to be blended into a more complete explanation of the term structure of interest rates. The resulting model is then tested using an approach taken by Modigliani and Sutch as mentioned. Data from the war period, 1941 through 1951, are used for the empirical tests. The justification for this is that, if debt supply affects the yield structure at all, it should be evident in these data. Most studies conclude that debt maturity has little effect on the yield curve, but these studies generally examine periods when no particular debt maturity changes were being undertaken. This study finds that sufficiently large debt maturity changes can affect the yield curve both directly and through the expectations-formulation mechanism. The evidence of direct effects is in agreement with that found by Modigliani and Sutch in a postwar test of the model. The evidence that debt maturity changes affect expectations is consistent with growing evidence on how expectations are formulated.